Finance? Lease or Borrow? Pro's and Con's

Looking at getting either a Hurco VM1 or VM2 to do our manufacturing and I am looking for your experiences with Lenders (The Big Bad Bank ) or Lease Companies and how they were to work with. I have found one local Banker that thinks that a Vertical Machining Center was a "specialized" piece of equipment, but yet they loan on Farm Tractors. Do they think that Farm Tractors are born? Just a little frustrated and need feedback from the group. If you used a Lease company and they were clueless morons or had no customer service skills - let me know. What say you group?

Since I'm from a Bible Belt state - I'll say "Merry Christmas and a Happy and Prosperous New Year to you all" - Not intended to offend any non-believers anywhere.

I found Machine Tool Finance to be a good co when I did lease. I think they may have changed the Co Name since, but they are part of a bank based I believe in Portland OR.

As to wether to lease or not, ask your accountant.

Here they are
http://www.usbank.com/cgi_w/cfm/commercial_business/products_and_services/equipment/machine_tool_ps.cfm

We've been talking to bank and leasing companies lately.

The problem that banks seem to have with lending money for a machine is that they can't get a title for the machine if it is to be collateral. Also, they have very little knowledge about how long the machines last and how they depreciate. And finally, the have no clue on how to get their money back out of the machine if you default on the loan.

When we rephrased it as "manufacturing equipment" we started to get the bank to relax a little.

I bought a used surface grinder this summer.I was going to lease as I wanted it right away.As I started to get the paper work in I noticed the rates were way higher then just going to bank.Lease guy said it would save me money.Niether I or my accountant could justify the high rates just to write it off differently.since it was around 10K it could be written off in 1 year.Machining center might be different.
Lease guy said he could show me how it was cheaper to pay higher payment & save money but I didn't get it.
Bank lent me the money at less then 9% & did it overnight.They don't regularly deal with machine tools but do allot with farm equipment.Also Pa lets them file a lien on the pc I forget what its called.

call Matt Borman at National City Finance
513-233-2138, he does all the Hurco Factory machines.
he's a stand up guy, he processed my app, rate was less than 8%

I'm buying a new VMC and will be using US bancorp. I've used them for three lease/purchases over 12 years.
Carl

I am no financial wiz by any stretch of the imagination. In El Paso, one of the banks has one guy that deals with nothing but machine tool and industrial type loans.

I met him a few years ago at one of the Mazak factory tour shindigs. He was there to get a better appreciation for what it is that he was loaning money for. As he said, normal bankers are kind of iffy on handing 100k to someone for a machine tool, but from his one man department, thats not even really questioned, he knows it can make the money back easily and quickly.

I don't even know what bank he works for but I gave his name and # to the owner, and 2 weeks later a nice brand new Hyd-mech shows up on our doorstep, no muss, no fuss, no justifying how its going to save 36 cents an hour.

I might try calling your larger local banks and seeing if they have a department like that. We did one of those lease deals through a normal bank, I don't know the specifics, thats for the owner and the bean counter to figure out, it was quick and easy, and nobody was complaining about huge interest rates.

I will contact Matt Borman tomorrow (as if by magic, he sent me an E-mail off list-like he was reading my mind), I also have a contact in Regions Bank through a church connection. I have talked to Matt before and found him to be a real nice guy and quite helpful. We are a small company and don't really need to do any outside work to support our operation. We are in a full blown expansion mode and moved to Tennessee to grow larger, until we met the Bankers with no vision.

Over the last four years I have paid out 52k to others to pay off their machines and would rather grow machine asset value instead. But I'm preaching to the choir. Their is no doubt in my mind that we could pay off the machine in 12 to 18 months. What is more important to me is not having to settle for a downsized machine when the scale of ecconomics points to a VM2 with more table real estate.

Getting a machine financed (lease or lend) is key to us expanding our product line by 400%.

Through out sourcing and running a POS Lathe and Mill (you do know what POS is don't you? - Piece of *hit) we have grown by 200% every year the last four years in a row with growing product demand.

So now you know the story. Our business credit is aces, even though our personal is suffering from having to carry two mortages. One goes away on the 29th - finally sold the property and can't wait for the closing.

Interest rate doesn't bother me either since I know it will be short term loan. If I were buying a KIA 21MLS - I might look more at the rate. Or if I were going for more than 100K, but right now I'm not looking for more than what a SUV would cost.

We bought this property in Tennessee with the eye toward putting up a new shop building (4000 sq. ft) and hiring machinist /welders. But you all know how that is.

Thanks for all the replies and keep them coming.

Frank

I don't want to steal this thread, but this kinda goes with it.

When I take out a loan for a machine, the banker man is always questioning why in the world I would want to put a big chunk of change down as a down payment. They tell me you should put down as little as possible to make the machine pay for itself. I always tell them, it's nice to have the machine pay for itself, but in the real world, times get slow. It isn't always full of work. If I put money down to make my payment cheaper, I am in better shape during those lean times.

What's really the better philosophy here?

Being old and having seen tougher times (yep I survived the Jimmy Carter years of sky high interest rates), I would opt for maintaining a reserve instead of putting every last dollar down. Besides, in my case extra bucks mean a welding positioner for Amy the welder, so she doesn't put her back out TIG welding or a better welding machine, or tooling or more important; work holding devices to make setups easier.

In lean times, its good to have a reserve. Ask any long time shop owner / survivor.

Frank

I've gotten outstanding service from Matt Buchalski at Direct Capitol
Fast, fair and pretty good interest rates

I've found leaseing to be a good way to go. Use a company that specializes in machinery. Get several of them bidding against each other. Take your time. Be very, very patient and act like your not really sure what you want to do. You'll notice the rates come down more and more the longer you take.

PBMW,

What was your interest rate (from Direct Capitol) on your most recent purchase?

I'd have to go look. it's in the 8's though

On Topic: Banks are fine if you can GET THE MONEY out of them. Leasing companies 'get it' and have no problems. I have used Stearns out of Minnesota for 3 leases in 12 years, and while they are not cheap[and their late fees will give you religion] they are very professional. On my VMC, the guy I spoke with had read my tax return, and understood what it meant.

My accountant writes dollar buyout leases as loans anyway, so the difference is moot.

Side Topic:
If you pay cash, you increase your near term taxes, IOW, you are paying more in tax in year one because you cannot write off your total expense that you actully paid.
If business shuts down, you are now out of YOUR money instead of the BANKS money. I don't want to push the concept too far, but I would rather have the money and let the bank hold the auction.

This is business, not a tea party. A bank will roll on you in an instant. AFAIK all business loans are callable, and if your reports don't look right or a new MBA takes over the bank, they can call your note and take your business, so I would not feel bad if in an emergency a bank got stuck with a machine. Banks will frequently want to tie your house to a loan. Screw that.

While I respect the ethos in paying cash, that money is better off in your retirement account, or just in the bank getting 2 percent. If [God forbid] something happens to your health, that cash is a lot handier than a paid off depreciated machine tha tyou can no longer run.

you are now out of YOUR money instead of the BANKS money.

Click to expand...

But if you're out the banks money, they will collect from your assets anyway so it's your money either way, correct?

or just in the bank getting 2 percent.

Click to expand...

In the bank getting 2 percent, instead of saving 8 percent on the loan. Seems like a 6 percent loss.

I'm not arguing here, I may be just plain wrong, but if I am, I'd like it explained to me. That 1500.00 dollar per month machine payment is just another bill that chews up my working capital, the way I see it. I just don't have the cash flow to pay employees, rent, all the other expenses and then pay a machine payment too. Maybe I need to raise my prices, I dunno.

Dave
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In the bank getting 2 percent, instead of saving 8 percent on the loan. Seems like a 6 percent loss.
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The 2 percent is an annual interest, while your down payment's 8% savings is spread over 5 years.
At the end of the day the difference usually favors the low downpayment/higher monthly amount. As long as you can easily swing the payments and plan to carry the term.
AFAIK, put the extra in the bank earning 2%, put down as little as you have to. When comes time to pay off the loan, just use the deposited amount. In between that same money makes a nice cushion to fall back on if needed.

Seymour,

Ok, it makes a little more sense now. I figured I was missing something in the mix. Financial smarts is not my strong point.

Dave


What chews up your working capital is the large downpayment or the paid-in-cash machine and not the monthly payment. That is an expense.
Every time I've looked at it, if you have to worry about $1000, $15000, or even $5000 monthly payments, then leasing/borrowing is the option.
OTOH if you're on the level of Donald Trump, then you'd be nuts leasing such small amounts.
Not sure what the actual amount is because it's different for each organization, but you should only pay cash if:
A: You've been planning and put money aside for it
B: The cash payment is insignificant enough that it will not impact your operation in absolutely no negative way.
You can think of it this way. You would not deposit your daily lunch money into an IRA, but a $100 lotto winning does belong there.

Here's a reason why I'm looking at it like I am. I leased my first machine. Payments were not a problem. I leased my second machine before my lease was over on the first machine. In order to produce enough money to make the lease payments, both machines needed to run steady. That meant hiring another body. Now, with the lease payments, lease on a building, and employee wages, any money coming in was being spent on those expenses. Eventually, I grew and needed more space. Great, higher rent costs. I reached a point where most of the money coming in covered my expenses but it was difficult to come up with estimated tax money for the irs. I ended up taking some 401K money and paying off my machines. Now I have plenty of working capital because it isn't going out the door each month in machine payments.